A BATTLE OF CHOICES : The Merger Dilemma in the Insurance Sector

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A BATTLE OF CHOICES : The Merger Dilemma in the Insurance Sector

Taking a cue from the banking industry, the insurance sector is also gearing up for a merger drive. Two insurance companies–Himalayan General Insurance and Everest Insurance– recently started joint transactions after completing the merger process. Nearly a dozen other insurers–both life and non-life insurers–have announced their plan to go for a merger. Beema Samiti is pushing for merger to lower the numbers of institutions to ease its supervisory task while insurance companies are under pressure for the marriage to raise the minimum paid up capital. Experts call for a cautious approach as merger upon pressure and without any study could lead to new sets of complications in the financial market.


Six years ago, Beema Samiti - the insurance regulatory authority of Nepal - decided to issue operating licences to 10 new insurance companies. The decision to add a whopping number of insurance companies at that time took many by surprise.

When the banking industry was gearing up for a merger and acquisition (M&A) drive amid concerns that a high number of bank and financial institutions (BFIs) could challenge the financial stability, Beema Samiti decided to take an opposite approach for the insurance industry.

It went on with its decision to bring 10 new insurance companies into operation despite the presence of 30 insurers in the market, which, analysts said, was already ‘overcrowded’. But, the expectation was that the entry of new players in the market would help to increase the insurance penetration and geographical coverage as most of the insurance companies were concentrated mainly in the urban areas.

There was still ample space or market for them if they had left their comfort zone to tap businesses either in rural areas or in new cities. At that time, the ratio of insurance coverage to the population was around 20% only. This is an indicator that shows that Nepal’s large population is still outside insurance cover.

Citing higher operating and administrative costs, insurance companies were reluctant to expand their services to rural areas. High concentration in urban areas, particularly in the capital city Kathmandu, caused ‘unhealthy business practices’ among many insurance companies who were competing with each other to get the same piece of cake, according to observers.

Merger, Mainly Regulator’s Interest
The regulatory capacity of Beema Samiti, however, did not grow in line with the number of insurers in the country. It made supervision of insurance companies not only difficult, but almost impossible for the understaffed regulator. It then pursued a policy to promote merger and acquisition among insurance companies, after just six years of licensing 10 insurance companies.  

However, it did not make M&A an official approach to reduce the number of insurance companies. Beema Samiti came up with a new regulation that it hoped would prompt many insurers to go for amalgamation without its prodding.

In March 2017, it decided to raise the minimum paid-up capital requirement for insurance companies by four times. The paid-up capital floor for life insurance companies was increased to Rs 2 billion from Rs 500 million, while such requirement for non-life insurance companies was increased to Rs 1 billion from Rs 250 million.

Though senior officials of Beema Samiti deny that M&A among insurance companies was the main purpose behind the decision to raise paid-up capital requirement, they acknowledge that their expectation was that such regulation would eventually help in serving its interest of reducing the numbers.

As all insurance companies would face difficulty in raising capital on their own, Beema Samiti was hoping that such insurers would have to go for amalgamation to meet the new capital floor.

However, Beema Samiti’s calculation went wrong. None of the insurance companies chose the path of ‘inorganic growth’. Almost all of them submitted their plans to the insurance regulatory authority, pledging to raise paid-up capital from their own shareholders.

When its first attempt to push for a merger did not lead to a decline in the number of insurance companies, it is trying the same strategy again. In March, it again decided to raise the paid-up capital of insurance companies. The paid-up capital requirement of life insurance companies and non-life insurance companies has now been raised to Rs 5 billion and Rs 2.5 billion respectively with a deadline of Chaitra 2079 (mid-March 2023).

“We have not told insurance companies to go for a merger. They should be well-capitalised. If they cannot raise the capital on their own, merger or acquisition could be a choice,” says Raju Raman Poudel, Executive Director at Beema Samiti. “We are ready to facilitate them if they choose that path. If there are fewer insurers, it makes it easier for us to supervise and regulate the insurance market. All companies have spontaneously come forward for the merger,” says Poudel.

While Beema Samiti says that it has not instructed insurance companies to go for a merger, the regulatory body’s restriction on rights issue to meet the new paid-up capital requirement is aimed at indirectly pressing them for the same.

Immediately after the Beema Samiti’s decision to raise the paid-up capital floor, two non-life insurance companies announced that they would go for a merger. On May 5, Himalayan General Insurance and Everest Insurance Company Ltd signed a memorandum of understanding for merger.  The two companies completed the merger process in less than one and half months and started their joint operation as ‘Himalayan Everest Insurance Ltd’ from July 17, becoming first in Nepal’s insurance sector to complete the merger process.

More mergers in pipeline
Himalayan Everest Insurance Ltd is not going to be alone in pursuing this approach of marriage to become a bigger player in the market. There are at least a dozen insurance companies that have initiated a process to go into the amalgamation process. Beema Samiti seems to be upbeat with the progress of merger among insurance companies that it has been promoting indirectly.

“The first merger has been successfully completed which will encourage other insurance companies also to go for merger. There are around a dozen other insurance companies who have either started the process or shown interest in the merger,” said Beema Samiti’s Executive Director Poudel.

According to Beema Samiti, over a dozen insurance companies have started their merger process following its decision to raise the paid-up capital requirement. Most of them are non-life companies. And half of them have already signed agreements for the merger.

Ajod Insurance Ltd and Prabhu Insurance Ltd have already signed a memorandum of understanding for the merger. Sagarmatha Insurance Company Ltd has also signed a merger deal with Lumbini General Insurance, while Siddhartha Insurance Company Ltd is pursuing merger with Premier Insurance Company. Toward non-life insurance sector, Sanima Life Insurance Company Ltd and Reliance Life Insurance Ltd have announced that they have started the process for the merger.

Similarly, Prabhu Life Insurance has decided to merge with Mahalaxmi Life Insurance while Jyoti Life Insurance and Surya Life Insurance have also announced their merger deal. Three life insurance companies - Union Life Insurance Company Ltd, Gurans Life Insurance Company Ltd and Prime Life Insurance Company Ltd - are also in the merger process.

Beema Samiti’s Executive Director Poudel said that more insurance companies will sign merger agreements soon.

“In my view, the number of insurance companies will go down to 10 to 12. It may take more time for life insurance companies to complete the merger due to valuation,” said Poudel.

Short existence
The identity of many insurance companies is being wiped out in less than a half decade of their birth. As the insurance companies who received the licence in 2016 are struggling for survival, they are scrambling to find a partner for the merger. Following their merger with relatively bigger institutions that are older, the identity of the younger institutions will be erased from the market. Most of these young insurance companies are going to disappear even before floating their initial public offering (IPO). Insurance companies have to float at least 30% of their primary shares to the public.  The younger institutions have found it difficult to find business and offer return to their shareholders due to high competition in the market.

Most of the life insurance companies who have published their financial results for the fourth quarter of the last fiscal year 2021/22 have reported a decline in net profit growth rate compared to 2020/21. The cumulative net profit of 17 life insurance companies has fallen to Rs 2 billion in 2021/22 from Rs 3.59 billion to 2020/21.

The net profit of non-life insurance companies has not increased much, either. According to the unaudited financial results of 18 non-life insurance companies, their cumulative net profit has gone up slightly. Their net profit has gone up to Rs 4.55 billion in the last fiscal year 2021/22 from Rs 4.24 billion in the previous fiscal year.

Most of the companies which have seen their net profit go down are the new ones that received operating licences after 2017.  

With the decline in their net profit, shareholders of insurance companies are also likely to receive lesser returns. The pressure to increase the dividend is also likely to prompt top management of most of the insurance companies to go for the merger.

“It's difficult to survive in the market. The easiest route many would find at this moment is the merger. That's what they are doing now,” the CEO of an insurance company said, requesting anonymity.

Policy Conundrum
Some critics blame Beema Samiti for trying to emulate the merger practice of the banking industry in the insurance sector without any study or assessment of its impact. They say that the push for merger to reduce the number of insurance companies in less than six years of issuing new licences indicates the dilemma that the insurance regulatory authority is facing.

Neither the decision to issue new licences nor the push for the merger was based on any assessment on the number of insurance companies that are required for the economy of Nepal. The leadership of Beema Samiti is now finding itself in a difficult position to justify its decision to add over 10 insurance companies five years ago.

“In developed countries, studies are carried out to assess market players or whether there is healthy competition or a cartel. First, there must be such a study on the number of insurance companies that our economy needs. Any decision or strategy on reducing or adding the number of insurance companies should be on the basis of the result of such study,” says Rabindra Ghimire, an insurance expert.

Now a question arises, what would happen if most of the insurance companies decide to go for a merger? Will Beema Samiti allow that? Beema Samiti does not have an answer.   

“There is no vision for the insurance sector for even 10 or 20 years. Nor is there any estimate of human resources. Nobody knows for sure whether the business culture of insurance companies matches with each other. Mergers could lead to complications if these issues are not considered seriously,” said Ghimire, who is also an associate professor at the School of Business, Pokhara University.

As the merger in the insurance sector has just started, it is still not clear whether the marriage of insurers would really work. Most of the insurance companies are going for amalgamation due to a compulsion to meet the capital requirement. Experts say that such ‘unnecessary pressure’ could prove detrimental to the performance of the institution formed after the marriage.

“If insurance companies rush to merge due to regulatory pressure, there is a risk of such marriage falling apart or threatening the financial stability of the country,” said a former CEO of a life insurance company.  

However, Beema Samiti officials dismiss such concerns citing the ‘success’ in the banking industry.

According to Nepal Rastra Bank (NRB), a total of 245 banks and financial institutions have gone into M&A process as of mid-July 2022. Out of which, the licence of 178 BFIs was revoked with the formation of 67 BFIs.

Concerns of dominance
One of the major concerns on merger is that it could lead to a dominance of fewer institutions in the market. Though regulators rule out such immediate possibility, there could be a chance whereby a few insurance companies grow to a size or extent that perpetuates their dominance or control in the market.

“Higher number of companies also means competition among them to reach out to clients. Earlier, when there were few companies, clients used to come to the door of insurance companies to get the service while the entry of new companies led to service expansion that people are receiving insurance services in their own door,” says insurance expert Ghimire. “If the number of insurance companies declines, it could also create a possibility of dominance, monopoly or anti-competition in the market,” he says.  

“Multiple Benefits”
Chief executives of insurance companies believe that the merger has multiple benefits for the insurance companies as well as the overall market.  

For Vijaya Bahadur Shah, CEO of Himalayan Everest Insurance Company Ltd, the merger is needed not only to make the company stronger but also to increase the risk-bearing capacity and expand the business.

“It may seem that we went for a merger to increase the paid-up capital. But that was not the sole reason. There are many strategic reasons behind the merger. We have to expand our services to new areas and bring people from all parts of the country into the insurance net. That was not possible from small capital and manpower,” said Shah.

“Becoming bigger through merger also means becoming stronger. This will increase the trust of the company among customers and also help in expanding the business,” says Shah.

While acknowledging challenges, particularly about different business cultures, he is confident that they can be resolved by the senior management.

Mahendra Krishna Shrestha, the chairperson of Himalayan Everest Insurance, says that the higher capital alone cannot ensure the expansion of the business. “Merger helps to expand your coverage which is a must to increase the business,” he added.

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